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1 


GIFT 
JAN    30  19ic 


BEFORE  THE 

Interstate   Commerce   Commission 


THE  FIFTEEN  PER  CENT.  CASE. 


Docket  Ex  Parte  No.  57. 
Supplemental  Hearings,  November  5th — 19th,  1917. 


fBRARY  or 

ARGUMENT    OF    GEORGE  STUART   PATTERSON   ON 
BEHALF  OF   THE   EASTERN  CARRIERS. 


Press  op  Allen,  Lane  &  Scott,  Philadelphia. 


WV^%i^- 


^   ^'^ 


BEFORE  THE 

Interstate  Commerce  Commission. 


THE  FIFTEEN  PER  CENT.  CASE. 


Docket  Ex  Pakte.    No.  57. 
Supplemental  Hearings  Noyember  5tli — 19tli,  1917. 


ARGUMENT  OF  GEORGE  STUART  PAT- 
TERSON ON  BEHALF  OF  EASTERN  CAR- 
RIERS. 


OPENING  ARGUMENT. 

Mr.  Chairman  and  Gentlemen  of  the  Commis- 
sion, may  I  ask  your  earnest  attention  to  this  brief 
statement  of  what  are  the  facts  in  this  matter  % 

The  Eastern  carriers  are  at  the  present  time  on 
an  annual  increased  basis  of  cost  over  1916  of 
$278,000,000  a  year,  of  which  $103,000,000  is  rep- 
resented by  labor,  $86,000,000  by  fuel,  and  $89,- 
000,000  by  the  cost  of  materials.  This  figure  of 
$278,000,000  does  not  include   anything  for  the 

3G9990 


^'^^  t'?^>2*'->»  ^  :  „-.;  -v^-^  ^,.^  ^ 

increased  taxes  which  the  carriers  will  have  to 
pay  this  year  and  in  the  future,  approximated, 
at  the  present  time,  for  the  Eastern  carriers  at 
$19,000,000  per  annum;  nor  does  it  include  any- 
thing to  represent  the  increased  cost  of  the  capital 
when  the  carriers  shall  be  able  to  obtain  such 
caiDital;  nor  is  there  any  increment  representing 
the  increased  depreciation  charges  which  will 
have  to  be  made  in  the  future  on  account  of  the 
present  increased  cost  of  equipment. 

As  against  this  figure  of  $278,000,000,  the  Com- 
mission have  already  this  year,  since  January 
first,  granted  increases  in  rates  which  will  ap- 
proximate $97,000,000  or  $98,000,000.  The  in- 
creases of  the  remaining  rates  which  were  not  in- 
creased last  spring,  and  which  are  now  imme- 
diately before  you  today,  will  probably  produce 
revenue  (on  that  same  basis)  of  $57,000,000  or 
$58,000,000,  this  leaving  $123,000,000,  which  will 
have  to  be  made  up  by  the  carriers  if  they  are  to 
be  in  a  position  in  which  they  can  meet  the  events 
of  today  and  the  necessities  of  the  future. 

It  will,  therefore,  be  necessary  for  the  carriers 
to  make  application  for  further  increases  in  rates, 
and,  as  I  assume  that  the  Commission  would  re- 
quire that  a  hearing  be  had  before  such  increases 
were  granted,  applications  will  be  filed  in  due 
course  by  the  Eastern  carriers,  asking  for  further 
increases  in  rates,   in   order  that  th^y  may  be 


enabled  to  secure  the  revenue  which  they  so  sorely 
need. 

This  point  I  want  to  make  clear  and  bear  in 
mind  through  this  entire  discussion,  viz.,  that  the 
completion  of  the  balance  of  the  15  per  cent,  pro- 
gram will  not  afford  the  carriers  those  revenues 
which  the  public  interests  demand. 

So  far  as  it  is  humanly  possible  to  look  into  the 
future,  it  is  clear  that  the  present  cost  of  conduct- 
ing transportation  and  the  present  cost  of  the 
maintenance  of  these  properties  will  not  decrease. 
In  fact,  whatever  evidence  there  is  on  the  subject 
would  seem  to  indicate  that  the  basis  of  cost,  in 
labor,  at  least,  will  increase. 

Commissioner  Clark  : — Mr.  Patterson,  -you 
stated  that  the  carriers  were  on  an  increased  oper- 
ating basis,  involving  $278,000,000? 

Mr.  Patterso:n^: — ^Yes,  sir. 

Commissioner  Clark: — And  you  said  what 
would  probably  be  realized  from  the  increases  in 
rates.  Now,  you  have  not  said  anything  about 
whether  or  not  there  is  any  increased  net  to  offset 
any  part  of  the  increased  costs. 

Mr.  Patterson  : — I  am  going  to  deal  specifically 
with  that  question,  sir,  when  we  come  to  the 
figures,  which  show  the  results  of  the  current  nine 
months'  operation,  and  also  the  results  of  the  year 
ending  June  30,  1917.  They  show  the  practical 
result  of  the  increases  allowed. 


Now,  if  it  please  the  Commission,  as  our  armies 
increase  into  the  million,  as  the  carriers  are  called 
upon  to  meet  the  competition  for  labor  of  in- 
dustries whose  prices  are  regulated  or  unregulated, 
as  the  carriers  are  called  on  to  meet  the  competi- 
tion of  the  government  itself  in  the  labor  market, 
it  is  clear  that  neither  the  supply  nor  the  efficiency 
of  labor  will  increase,  and,  therefore,  for  some 
time  to  come,  we  must,  unless  the  government  is 
prepared  to  both  conscript  labor  and  to  limit  its 
wage — and  I  do  not  suggest  that  it  should  do 
either — unless  the  Government  is  prepared  to  do 
that,  it  is  quite  clear  that  labor,  measured  both 
by  its  price  and  by  its  efficiency,  will  substantially 
increase  in  cost  to  the  carrier. 

In  the  case  of  fuel,  the  Grovernment  fixed  the 
price  originally  at  $2.00  a  ton^  which  was  from  70 
to  80  per  cent,  higher  than  many  if  not  most,  of 
the  carriers  were  paying.  That  price  has  now 
been  increased  by  the  Government  to  $2.45  a  ton, 
which  is  higher  than  the  contract  price,  even  at 
the  present  time,  of  many  of  the  carriers,  and 
which  increase  has  had  this  further  effect.  The 
increase  from  $2.00  to  $2.45  a  ton  carries  with  it 
an  increase  of  wages  to  the  miners,  and  under  the 
terms  of  the  contracts  of  many  of  the  carriers,  an 
increase  in  the  rate  of  pay  to  the  miners  auto- 
matically increases  the  price  of  coal  to  the  pur- 
chaser.    Therefore,  so  far  as  the  fuel  situation  is 


concerned,  the  only  relief  that  can* come  at  any 
time  in  the  future  is  upon  the  expiration  of  exist- 
ing contracts,  and  upon  the  assumption  that,  in 
the  meantime,  the  government  does  not  again  raise 
the  price  of  fuel  at  the  mines. 

The  situation  with  respect  to  materials,  though 
more  complex  in  its  operation,  is  identical  in  its 
results. 

The  upward  tendency  of  the  price  of  certain 
materials  seems  to  have  been  halted.  The  prices 
fixed  by  the  Government  are,  generally  speaking, 
far  above  the  prices  paid  by  the  carriers  in  1916, 
and,  therefore,  for  the  purposes  of  discussion,  it  is 
a  conservative  statement  to  take  as  our  estimate 
of  increased  basis  of  cost,  the  figures  we  had  last 
May,  of  $89,000,000.  There  is,  however,  the  testi- 
mony in  this  record  of  many  of  the  witnesses  as 
to  the  higher  prices  which  they  have  been  and  are 
now  paying,  at  this  time. 

We  cannot  therefore,  unless  we  are  to  blind  our 
eyes  to  the  plain  facts,  fail  to  recognize  that  the 
eastern  carriers  are  on  a  much  higher  basis  of 
operating  costs,  than  they,  or  any  other  carriers 
have  ever  been  in  this  country.  As  Mr.  Norris 
said  on  Friday,  we  are  in  the  position  of  the  manu- 
facturer who  has  had  his  raw  material,  namely, 
fuel,  labor  and  material  raised  in  price.  To  meet 
that,  he  must  raise  the  price  of  his  finished  pro- 
duct— in  our  case,  transportation — and  that  is 
what  we  are  asking  you  to  do. 


Now,  what  has  been  the  result  of  this  increased 
basis  of  cost  to  the  carriers  ?  There  are  three  sets 
of  figures  which  are  available  for  the  use  of  the 
Commission.  Those  figures  are,  first,  the  opera- 
tions of  the  first  nine  months  of  the  calendar  year 
1917  as  compared  to  the  corresponding  months  of 
the  preceding  year;  secondly,  the  results  of  the 
year  ending  June  30,  1917,  as  compared  with 
previous  years;  and,  third,  the  estimate  of  what 
will  be  the  result  of  the  calendar  year  1917  as 
compared  to  previous  years. 

1917  is  the  year  of  largest  gross  revenues  in  the 
history  of  the  carriers.  There  never  has  been  any- 
thing like  it.  We  would  naturally  expect,  as  the 
result  of  that  tremendous  increase  in  gross,  to  see, 
as  we  did  in  1916,  when  the  same  phenomenon 
was  observed,  that  there  would  be  a  large  increase 
in  net.     The  contrary  is  the  fact. 

In  the  case  of  the  38  systems,  in  the  first  nine 
months  of  1917,  gross  increased  $123,000,000, 
which  should  have  a:fforded  a  substantial  increase 
in  net.  The  fact  is  that  net  decreased  $57,000,- 
000.  In  the  case  of  the  so-called  typical  systems, 
the  Baltimore  and  Ohio,  the  New  York  Central, 
and  the  Pennsylvania,  gross  increased  $70,000,- 
000.     Net  operating  income  decreased  $38,000,000. 

When  we  had  tliis  case  before  you  last  s^Dring, 
you  only  had  the  figures  available  for  the  first 
four  months  of  1917.     The  figures  for  the  last 


five  months  are  now  available,  and  they  show  an 
increase  in  gross  of  $92,000,000  and  a  decrease  in 
net  of  $20,000,000. 

Commissioner  Anderson: — Mr.  Patterson,  are 
you  speaking  of  the  year  ending  June  30,  1917, 
or  of  the  nine  months  of  the  calendar  year  1917? 

Mr.  Patterson: — The  nine  months  of  this  cal- 
endar year.  I  am  speaking  now  of  the  calendar 
year,  that  is,  the  first  nine  months  of  1917. 

Beginning  with  June  and  continuing  up  to  and 
including  September,  every  month  has  shown  a 
larger  decrease  in  net  operating  income,  and  every 
month  has  shown  a  smaller  increase  in  total 
operating  revenues.  August,  in  which  were  ef- 
fective the  increased  rates  granted  by  the  Com- 
mission on  export  grain,  export  iron  and  steel, 
tidewater  coal,  lake  coal,  line  coal,  ore,  and  many 
of  the  class  rates,  but  not  all,  showed  an  increase 
in  gross  of  $20,000,000  and  a  decrease  in  net 
operating  income  of  $3,750,000.  And,  mark  you, 
in  each  one  of  these  months  there  has  been  a  large 
increase  in  both  the  trainloads  and  the  carloads. 

The  Chairman: — That  figure  for  August  of 
$20,000,000  increase  in  gross  and  a  corresponding 
decrease  in  net  was  as  compared  with  the  preced- 
ing month? 

Mr.  Patterson  : — The  preceding  year,  sir. 

The  Chairman: — The  corresponding  month  in 
the  preceding  year? 


8 

Mr.  Patterson: — The  corresponding  month  in 
the  preceding  year,  yes.  In  other  words,  the  com- 
parison is  being  made  on  the  same  basis  as  is  the 
comparison  contained  in  the  monthly  reports  of 
the  carriers  to  the  Commission. 

September  shows  an  increase  in  total  operating 
revenues  of  $16,000,000— $16,400,000,  if  I  remem- 
ber correctly — and,  again,  a  decrease  in  net 
operating  income  of  $6,400,000. 

The  October  figures  are  not  finally  completed, 
and  are  not  available  as  yet  to  the  Commission; 
but  if  the  figures  for  the  38  systems  are  similar 
to  the  figures  for  the  Pennsylvania  Railroad  Sys- 
tem— and  there  is  no  reason  to  doubt  but  that 
will  be  the  fact — you  will  find  that  October  will 
also  show  large  increases  in  gross  and  large  de- 
creases in  net. 

Now,  you  will  remember  that  a  few  minutes  ago 
I  said  that  in  these  first  nine  months  the  operat- 
ing revenues  increased  $123,000,000.  During  that 
same  period  of  time — and  I  am  speaking  now  of 
the  38  systems — the  transportation  expenses 
alone — primarily,  of  course,  labor  and  fuel — for 
the  38  systems  increased  $127,000,000,  and^  in  the 
cases  of  three  systems  the  total  operating  reve- 
nues increased  $71,000,000  in  that  same  period, 
and  other  transportation  expenses  increased  $73,- 
000,000.  That  is  to  say,  as  a  practical  matter, 
though,  of  course,  it  is  not  technically  accurate, 


the  increase  in  revenue  which  has  been  derived 
not  only  from  the  increased  business,  but  also 
from  the  increase  in  the  rates  granted  by  this 
Commission,  has  been  entirely  taken  up  and  en- 
tirely absorbed  in  the  cost  of  transportation,  leav- 
ing nothing  from  either  increased  business  or  in- 
creased rates  to  contribute  to  the  cost  either  of 
maintaining  these  properties  or  to  the  cost  of 
procuring  the  necessary  capital  to  make  additions 
and  betterments. 

It  is  not  necessary  to  refer  in  detail  as  to  the 
increased  items  of  particular  costs  in  transporta- 
tion expenses,  because  that  has  been  covered  at 
length  in  previous  hearings  and  in  this  hearing; 
but  I  want  to  call  your  attention  to  one  thing, 
and  that  is  that  labor,  not  the  four  Brotherhoods, 
not  the  labor  which  was  affected  by  the  Adamson 
Act  adjustment,  but  other  labor,  has  increased 
in  cost  to  the  carriers  $26,000,000  since  the  hear- 
ing took  place  in  May. 

,Within  the  last  month  the  Pennsylvania  System 
has  increased  its  wages  to  the  amount  of  $7,000,- 
000  to  telegraph  operators,  maintenance  of  way 
employes,  machinists,  employes  in  the  motive 
power  department,  clerks  in  the  transportation  de- 
partment and  accounting  department,  &c. 

The  Baltimore  and  Ohio  and  the  New 
York  Central,  though  this  fact  does  not  ap- 
pear upon  the  record,  have,  within  the  last  week, 
made  another  very  large  increase  in  their  wages 


10 


to  employes  of  the  same  general  description.  My 
impression  is,  although  it  is  only  an  impression, 
that  in  the  case  of  the  New  York  Central  it  will 
amount  to 'something  like  $4,000,000  a  year,  and 
in  the  case  of  the  Baltimore  and  Ohio  to  some- 
thing like  $2,500,000  a  year. 

The  true  significance,  however,  of  the  results 
of  the  first  nine  months'  operation  is  not  disclosed 
by  the  bare  statement  that  net  operating  income 
has  decreased  $57,000,000,  because,  if  it  be  a  fact 
that  during  that  period  those  properties  have 
not  been  maintained  to  the  extent  that  they 
should,  it  is  perfectly  clear,  that  to  the  extent  of 
the  deferred  maintenance,  the  net  operating  in- 
come and  the  net  corporate  income  is  overstated. 

The  maintenance  figures  which  are  available 
for  the  first  nine  months  on  the  38  svstems — and 
we  have  substantially  the  same  result  for  the 
three  systems — show  that  there  has  been  ah  in- 
crease in  total  operating  revenues  of  approxi- 
mately 9  per  cent,  and  an  increase  in  maintenance 
of  way  expenditures  of  6.3  per  cent.  Of  course, 
operating  revenues  have  increased  not  only  by 
reason  of  the  increase  in  traffic,  which  factor 
would  necessarily  cause  an  increase  in  mainte- 
nance expenses,  but  operating  revenues  have  also 
increased  owing  to  the  increases  in  rates  which 
have  been  allowed  by  the  Commission,  and  that 
factor,  therefore,  would  not  cause  a  corresponding 


11 


increase  in  the  maintenance  expenses.  Therefore, 
we  cannot  expect,  nor  do  we  suggest  that  where 
there  have  been  increased  rates,  the  maintenance 
ratio  should  increase  in  the  same  proportion  as 
the  ratio  of  total  operating  revenue;  but  there  is 
a  disparity  of  50  per  cent.,  one  being  6  per  cent, 
and  one  being  9  per  cent.,  in  the  ratio  of  increase, 
and  when  we  remember  also — and  this,  after  all,  is 
the  all-important  thing — that  the  dollar  expended 
for  maintenance  in  1917  does  not  purchase  either 
the  labor  or  wages  which  the  dollar  expended  in 
1916  purchased,  it  is  quite  clear  that  these  per- 
centage figures  show  that  the  maintenance  of 
these  properties  is  not  being  kept  up  to  its  proper 
standard. 

The  Chairman: — Mr.  Patterson,  do  you  in- 
clude in  that  maintenance  of  equipment '^ 

Me.  Patterson: — No,  Mr.  Chairman;  I  am 
speaking  first  only  as  to  maintenance  of  way 

The   Chairman: — Onlv  as  to  maintenance   of 

»/ 

way? 

Mr.  Patterson: — Yes;  maintenance  of  way, 
that  is  all. 

The  Chairman: — And  in  your  revenues  are 
you  including  passenger  revenues  ? 

Mr.  Patterson: — I  beg  your  pardon? 

The  Chairman  : — In  your  revenues,  the  figures 
of  revenue,  are  you  including  passenger  revenue  ? 


12 

Mr.  Patterson: — The  figures  of  the  total  in- 
crease ? 

The  Chairman: — ^Yes. 

Mr.  Patterson: — Oh,  yes,  sir. 

The  Chairman: — Yes*? 

Mr.  Patterson  : — Undoubtedly. 

The  Chairman: — Has  that  revenue  fallen  off 
through  the  cutting  out  of  passenger  trains  1 

Mr.  Patterson: — No,  sir;  there  has  been  a  tre- 
mendous increase  of  passenger  revenues.  I  am 
speaking  for  the  Pennsylvania  on  that,  and  I  as- 
sume that  is  so  for  all  the  lines.  There  has  been 
a  tremendous  increase. 

The  Chairman  : — You  have  been  carrying  more 
poeple  on  fewer  trains^ 

Mr.  Patterson: — Yes,  sir;  and  I  think  it  is  a 
very  serious  problem,  though  I  do  not  speak  with 
any  authority,  as  to  whether  the  passenger  busi- 
ness is  not  growing  to  such  an  extent  as  to  be  a 
positive  detriment.  I  do  not  mean  a  detriment 
to  the  railroads,  but  I  mean  a  detriment  to  the 
interests  of  the  people. 

Commissioner  McChord  : — Has  any  thought 
been  given  to  the  question  of  increased  passenger 
rates ^ 

Mr.  Patterson: — I  have  heard  that  discussed 
a  number  of  times.  There  are  two  practical  diffi- 
culties in  the  way  of  that.  There  is,  first,  the  dif- 
ficulty of  securing  the  increases  through  the  state 


13 

authorities.  There  are  the  2-cent  fare  laws  in 
certain  states.  You  are  more  familiar  than  I  am 
with  the  litigation  that  has  grown  out  of  those 
laws.  Your  Commission  suggested  in  1913  that 
the  passenger  rates  be  readjusted,  that  is,  that 
the  passenger  business  was  not  bearing  its  full 
share  of  the  expense  of  transportation,  and  efforts 
were  made  by  the  Eastern  carriers  to  secure  addi- 
tional revenues  from  the  passenger  service.  We 
have  secured  those  revenues,  to  an  inadequate 
extent  and  in  part  only.  In  one  particular  state 
up  to  the  last,  I  think,  two  months,  or  perhaps 
three  months,  the  action  of  that  state  has  pre- 
vented those  increases  from  going  into  effect  and 
has  not  only  been  to  deprive  the  carriers  of  the 
increase  in  rates  on  the  state  business,  but,  by 
reason  of  the  geographical  location  of  the  state 
itself,  has  interfered  substantially  with  the  col- 
lection of  the  increased  revenues  on  interstate 
business. 

There  is  also  the  second  question  which  I  think 
everyone  would  have  to  very  carefully  consider  in 
connection  with  that  passenger  situation,  and  that 
is  the  general  feeling  amongst  people — it  may  be 
an  entirely  mistaken  feeling;  it  may  not  be 
a  proper  one,  but  it  is  there — of  unwillingness 
to  pay  increased  passenger  rates,  even  though,  if 
they  are  intelligent  people,  they  must  realize  that, 
in  many  cases  they  must  pay  the  increased  freight 


14 

rates  in  the  increased  prices  of  commodities. 
When  however,  they  are  called  upon  to  pay  di- 
rectly through  the  passenger  rate  instead  of  in- 
directly through  the  freight  rate,  there  is  bitter 
opposition.  That  is  another  question  which  w^ould 
have  to  be  considered,  I  do  not  mean  to  suggest 
that  it  is  a  controlling  reason;  but  I  may  say  to 
you,  Mr.  McChord,  that  that  question  is  being 
given  careful  consideration. 

Commissio:n^er  Aitchison  : — When  you  speak 
of  proposed  advances  yet  to  be  asked  for,  you  do 
not  contemplate  the  passenger  advances  at  the 
present  time  ? 

Mr.  Patterson": — Oh,  no.  These  advances  we 
are  talking  about  now  are  simply  a  completion 
of  the  15  per  cent,  program. 

Commissioner  Aitchison: — But  do  I  under- 
stand, when  you  said  that  you  would  have  to  come 
back  for  further  advances,  that  you  did  not  have 
in  mind  that  you  would  have  to  come  back  to  us 
for  passenger  fare  advances  ? 

Mr.  Patterson: — I  cannot  state  positively 
whether  they  will  or  not.  I  would  say  probably 
not.    I  do  not  know  what  might  happen. 

The  Chairman  : — In  your  passenger  revenues, 
do  you  include  that  derived  from  the  movement 
of  troops  or  their  impedimenta  ? 

Mr.  Patterson:— I  presume  so,  but  I  do  not 
know.    How  about  that,  Mr.  Shriver? 


15 

Mr.  Shriver: — They  are  included  up  to  the 
date  of  the  closing  of  our  statistics. 

The  Chairman  : — And  you  also  include  it 
whether  it  has  been  paid  or  not  ? 

Mr.  Patterson^  : — Oh,  yes.  I  beg  your  pardon. 
I  thought  you  meant  as  to  its  apportionment  be- 
tween freight  and  passenger. 

The  Chairman  : — I  did.  I  asked  you  two  ques- 
tions. 

Mr.  Patterson  : — It  is  all  going  into  the  freight 
revenue,  I  presume,  as  to  the  impedimenta,  if  car- 
ried on  a  passenger  train.  It  does  not  if  it  is 
carried  on  a  freight  train? 

Mr.   Shriver: — No. 

Mr.  Patterson: — Now,  these  maintenance  fig- 
ures which  I  have  given  you,  and  which  are  de- 
rived from  an  examination  of  the  records  for  the 
first  nine  months  of  this  year,  are  confirmed  in 
Bureau  Exhibit  No.  1,  page  20,  showing  a  com- 
parison of  the  maintenance  ratio  for  the  year  end- 
ing December  31st,  1917,  with  the  maintenance 
ratios  of  the  years  ending  June  30th,  1916,  and 
June  30th,  1915,  and  there  is  also  in  that  exhibit 
a  comparison  for  those  same  periods,  of  the  actual 
work  in  maintenance  of  way  done  by  the  carriers 
during  the  first  nine  months,  and  which  will  be 
shown  during  the  last  three  months  of  this  year, 
1917.  Those  figures  show  that  there  has  been  a 
decrease  in  the  installation  of  ballast  of  48  per 


16 

cent.,  in  ties  of  1.7  per  cent.,  and  in  rails  of  36 
per  cent. 

The  evidence  contained  in  these  figures,  remem- 
bering also,  when  we  come  to  talk  about  the 
maintenance  ratio,  the  tremendous  decrease  in 
the  purchasing  power  of  the  dollar,  is  corrob- 
orated by  the  testimony  of  Mr.  Rea,  Mr.  Willard, 
Mr.  Elliott,  and  Mr.  Hobbs,  all  of  whom  testified 
as  to  the  failure  on  the  part  of  their  respective 
companies  to  keep  up  their  standard  of  mainten- 
ance of  way  and  maintenance  of  equipment,  the 
maintenance  of  equipment  figures  Mr.  Chair- 
man, as  I  recall  it,  being  an  increase  of  about  11 
per  cent,  as  compared  to  an  increase  in  total 
operating  revenue  of  9  per  cent.  These  four  gen- 
tlemen testified  as  to  the  facts  with  respect  to 
their  various  properties,  Mr.  Rea  estimating  that 
the  amount  of  the  deferred  maintenance  on  the 
Pennsylvania  was  $5,000,000;  Mr.  Willard  esti- 
mating for  the  Baltimore  and  Ohio  from  $1,000,- 
000  to  $1,500,000;  Mr.  Elliott  estimating  $800,000 
for  the  New  Haven,  and  Mr.  Hobbs  estimating 
$320,000  for  the  Maine  Central. 

The  Chairman: — That  being  an  estimate  of 
the  annual  rate'? 

Mr.  Patterson  : — No,  sir ;  that  is  an  estimate  of 
the  amount  of  the  deferred  maintenance  in  these 
properties;  that  is  to  say,  that  is  the  estimate  of 


17 

the  amount  of  money  that  should  be  expended  by 
these  companies  at  the  present  time. 

Mk.  Bond: — That  is  an  estimate  only  for  nine 
months. 

Mr.  Patteeson: — I  know — in  order  to  bring 
the  properties  up  to  their  proper  standard. 

Bearing  in  mind  the  specific  finding  by  this 
Commission  that  these  properties  were  not  over- 
maintained  in  1916,  it  is  quite  clear  that  they  are 
under-maintained  at  the  present  time,  and  that 
that  maintenance  must  be  made  up  at  some  time 
in  the  future,  and  it  ought  to  be  made  up  as  soon 
as  possible,  because,  as  Mr.  Willard  pointed  out, 
the  question  of  getting  men  and  materials  is 
going  to  grow  more  difficult  every  day. 

Our  second  comparison  so  as  to  show  this  in- 
creased basis  of  cost  upon  which  we  are  operating 
is  the  figures  for  the  year  ending  June  30th,  1917. 
Those  figures  show  that  there  has  been  an  in- 
crease in  total  operating  revenues  for  the  38  sys- 
tems of  $154,000,000,  and  that  there  was  a  de- 
crease in  net  operating  income  of  $45,000,000, 
notwithstanding  an  increase  in  property  invest- 
ment of  $200,000,000,  and  the  return  on  property 
investment  is  lower  than  the  return  for  the  years 
1906,  1907,  1910  and  1916,  and  identical  with  or 
higher  than  the  returns  for  any  of  the  other  four- 
teen years. 


18 

The  average  dividend  paid  by  the  38  systems 
during  the  year  ending  June  30th,  1917,  was  4.49 
per  cent.,  which  is  less  than  the  average  dividend 
paid  by  those  same  railroads  in  six  of  the  preced- 
ing eighteen  years;  and  one  thing  we  should 
always  bear  in  mind,  that,  measured  by  the  pur- 
chasing power  of  money,  the  dividend  of  4.49  per 
cent,  paid  in  that  year  ending  June  30th,  1917, 
was  lower  than  any  dividend  which  has  ever  been 
paid  by  these  companies  at  any  time  since  1900. 
I  have  not  gone  back  of  1900,  and  I  do  not  know 
whether  it  is  lower  than  the  dividends  paid  prior 
to  that  time. 

In  the  case  of  the  combined  three  systems,  we 
have  substantially  the  same  result  as  in  the  case 
of  the  38  systems,  with  the  exception  that  the  re- 
turn on  property  investment  in  the  case  of  the 
three  systems  is  lower  than  in  eight  of  the  preced- 
ing eighteen  years,  instead  of  in  four  as  in  the 
case  of  the  38  systems. 

CoMMissiONEK  Andeeson  : — ;Was  that  4.49  per 
cent,  dividend  on  capital  stock  or  return  on  prop- 
erty? 

Me.  Patteeson: — Dividend  on  capital  stock. 
The  return  on  property  was  5.71  per  cent.,  I  think. 

CoMMissiONEE  Andeeson  : — How  much  of  that 
$200,000,000  was  derived  from  new  capital  fur- 
nished, and  how  much  from  excess  earnings'? 


19 

Me.  Patterson: — I  can  tell  you  that,  when  I 
reply.  I  have  not  got  that  on  my  notes.  It  ap- 
years  on  the  face  of  the  exhibits,  and  when  I  come 
to  make  my  reply  I  will  deal  with  that  question. 

The  carriers  have  prepared  an  estimated  income 
account  for  the  calendar  year  1917  as  compared 
with  the  previous  years.  That  estimated  income 
account  shows  that  there  will  be  an  increase  of 
$161,000,000  in  total  operating  revenues  in  the  38 
systems,  and  notwithstanding  that  tremendous  in- 
crease in  gross,  there  will  be  a  decrease  in  net 
operating  income  of  $81,000,000. 

So  far  as  the  Baltimore  and  Ohio  Railroad  Com- 
pany is  concerned,  under  its  present  basis  of  ex- 
pense and  present  basis  of  rates,  that  company,  at 
the  end  of  the  calendar  year,  if  I  understand  Mr. 
Willard's  testimony  correctly,  will  not  only  not 
have  any  surplus,  but  will  not  even  earn  its  pres- 
ent moderate  dividend  of  5  per  cent. 

The  net  corporate  income  of  the  Pennsylvania 
Sj^stem  will,  if  the  estimate  is  correct,  have  fallen 
on  December  31st,  from  $82,000,000  during  the 
calendar  year  1916  to  $61,000,000  during  the  cal- 
endar year  1917,  and  after  the  payment  of  an 
average  dividend  of  6.48  per  cent,  will  have  a 
surplus  on  total  capital  obligations  of  $1,300,000,- 

000,  of  only  1.6  per  cent. 

The  New  York  Central  net  corporate  income  will 
have  fallen  from  $74,000,000  as  it  was  in  1916  to 


20 

$39,000,000  in  1917,  and  after  the  payment  of  its 
average  dividend  of  51/2  per  cent.,  will  have  a 
surplus  on  total  capital  obligations  of  $1,400,000,- 
000  of  only  1.3  per  cent. 

Now,  what  I  have  said  to  you  is  in  no  sense  an 
argument.  It  is  a  mere  statement  of  facts  which 
leads  irresistibly  to  the  conclusion  that  the  public 
interests — ^yes,  even  the  public  safety — demands 
that  these  railroads  be  permitted  to  increase  their 
rates. 

Those  facts  may  be  summarized  in  this  way : — 

First,  an  increased  basis  of  cost  of  $277,000,000, 
as  against  an  increased  basis  of  revenue  of  $97,- 
000,000. 

Secondly,  persistent  decreases  in  net  operating 
income,  notwithstanding  tremendous  increases  in 
total  operating  revenues,  and  substantial,  if  not 
large  increases  in  property  investment. 

Third,  a  decrease  in  the  supply  of  efficiency  of 
labor,  a  situation  which  is  being  intensified  daily, 
and  which,  if  persisted  in,  will  increase  the  cost  of 
operation  in  the  future  to  a  greater  extent  than 
it  has  in  the  past. 

Fourth,  the  existence  of  deferred  maintenance 
in  these  properties  at  a  time  when  the  public 
interest  demands  more  than  ever  that  these  prop- 
erties should  be  maintained  at  their  highest  stand- 
ard. 


21 


Fifth,  an  inability  on  the  part  of  the  carriers  to 
sell  stock,  thus  weakening,  and  seriously  weaken- 
ing, the  general  financial  structure  of  the  carriers. 

Sixth,  inability  to  make  improvements  which 
are  demanded  by  the  traffic  of  today,  and  which 
will  be  demanded  by  the  traffic  of  tomorrow. 

I  have  not  said  anything  about  the  close  and 
intimate  relation  which  this  rate  increase  bears  to 
the  successful  prosecution  of  the  war.  That  mat- 
ter has  been  dealt  with  at  length  by  Mr.  Willard 
and  by  Mr.  Warburg,  who  are  far  better  qualified 
than  I  am  to  speak  authoritatively  on  that  subject. 
They  have  told  you,  in  substance,  that  increased 
rates  are  necessary  in  order  to  aid  the  Government 
in  the  successful  prosecution  of  this  war. 

There  is  one  thing,  however,  which  I  do  desire 
to  say  in  conclusion,  and  I  desire  to  say  it  with  all 
the  earnestness  that  lies  in  my  power,  and  to  say 
it  to  you  who  are  so  keen  to  do  what  is  the  right 
thing,  and  that  is  this,  that  the  question  of  in- 
creased revenues  to  the  Eastern  carriers  has 
ceased  to  be  a  question  of  economics,  and  has  be- 
come now  a  vital  part  of  the  entire  problem  of 
national  defense. 

The    Chaieman: — Mr.    Patterson,    before    you 
take  your  seat,  let  me  ask  you  about  the  deferred 
maintenance  of  equipment.     Is  there  any  substan- 
tial falling  off  in  the  maintenance  of  equipment? 
Mr.  Patterson-: — There  is  some  failure  to  re- 


22 

shop  and  failure  to  paint.  That  is  dealt  with  at 
length  in  the  testimony  of  Mr.  Rea.  You  will  note 
that  the  increase  of  total  operating  revenues  is 
9  per  cent,  with  an  increase  of  11  per  cent,  in 
maintenance  of  equipment  expenses,  but  you  will 
remember  that  the  prices  of  labor  and  materials 
are  at  least  25  per  cent.,  and  probably  30  per  cent., 
higher  than  they  were  in  1916.  That  corroborates 
the  testimony  of  Mr.  Eea  as  to  the  failure  on  the 
part  of  the  carriers  to  shop  their  equipment  with 
the  regularity  they  have  in  the  past.  That,  of 
course,  will  have  to  be  made  up  in  the  future. 
The  unfortunate  part  of  it  is  that  the  more  it  is 
postponed,  the  more  expensive  it  gets,  and  that 
progressively. 

The  Chairman: — Are  there  not  fewer  bad 
order  cars  on  the  Pennsylvania  now  than  usual, 
and  than  is  ordinarily  the  case  ? 

Mr.  Patterson: — I  gave  some  figures  as  to  the 
bad  order  cars.  As  far  as  equipment  is  concerned, 
it  is  not  a  question  so  much  of  bad  order.  It 
is  more  largely  a  question  of  failure  to  paint. 
The  figures  which  we  were  asked  to  file  show,  sir, 
that  the  average  number  of  freight  locomotives 
in  shop  or  awaiting  shop  is  14.2  per  cent.,  Sep- 
tember, 1917,  over  September,  1916,  and  the  aver- 
age number  of  freight  cars  in  shop  or  awaiting 
shop  is  an  increase  of  44.86,  or  a  percentage  of 
increase  of  24  per  cent. 


23 


The  Chairman: — Those  figures  are  for  the 
Pennsylvania  ? 

Mr.  Patterson  : — Yes,  sir ;  and  they  are  in  evi- 
dence. 

The  Chairman: — Whom  shall  we  hear  next, 
Mr.  Patterson'? 

Mr.  Patterson: — As  far  as  the  carriers  are 
concerned,  that  is  our  opening.  If  any  questions 
should  come  up  about  particular  commodities, 
there  will  be  a  reply  made  to  them. 


24 

CLOSING  ARGUMENT  OP  MR.  GEORGE 
STUART  PATTERSON,  ON  BEHALP  OP 
THE  CARRIERS. 

Mr.  Patterson: — With  tlie  permission  of  the 
Commission  I  will  just  take  a  few  moments  to 
refer  in  a  desultory  way  to  one  or  two  sugges- 
tions that  have  been  made  here. 

In  reply  to  Commissioner  Anderson's  question, 
I  beg  to  say  the  property  investment,  1917  over 
1916,  is  $200,390,000,  of  which  $39,840,000  was 
paid  out  of  income.  The  balance  was  paid  out  of 
capital.  The  increase  during  that  period  of  time 
in  total  capital  obligations  was  a  little  over  $120,- 
000,000,  or  $120,965,000.  Those  figures,  of  course, 
cannot  be  compared,  because  the  capital  out  of 
which  the  improvements  were  made  has  been  is- 
sued either  prior  or  subsequent  to  making  the 
improvements,  and  therefore  it  does  not  neces- 
sarily come  within  the  year.  In  other  words,  the 
$120,000,000,  plus  the  $39,000,000,  do  not  make  up 
the  $200,000,000. 

Commissioner  Anderson: — That  means  about 
$80,000,000  gone  in  from  earnings  ? 

Mr.  Patterson:— No,  sir;  it  means  $39,840,000. 

I  -understood  Mr.  Thorne  to  say  that  the  Penn- 
sylvania System  had,  subsequent  to  1910,  about 
$350,000,000  out  of  income 

JVIr.  Thorne:— 1907. 

Mr.  Patterson:— 1907? 


25 


Mr.  Thorne: — And  it  was  not  just  out  of  in- 
come  

Mr.  Patterson  : — Oh,  I  beg  your  pardon ;  it  in- 
cludes everything. 

Mr.  Thorne  : — Out  of  earnings. 

Mr.  Patterson: — Then  it  is  from  earnings,  in- 
come or  surplus? 

Mr.  Thorne  : — It  is  from  earnings  through  in- 
come, surplus  and  otherwise.  Mr.  Rea  and  the 
rest  of  you  conceded  it  when  Mr.  Rea  was  on  the 
stand. 

Mr.  Patterson  :— Our  figures  are  $185,000,000. 

I  do  not  propose  to  go  into  any  discussion  as 
to  the  legal  right  of  the  carriers,  to  earn  a  return 
on  the  amounts  expended  in  property  investment 
out  of  earnings  or  out  of  surplus.  That  matter 
is  fully  covered  in  the  briefs  which  were  filed  in 
the  valuation  matter.  It  has  been  decided  about 
thirty  times  by  the  di:fferent  courts  of  this  coun- 
try, always  one  way.  It  is  being  decided  that 
same  way  almost  daily  by  different  state  commis- 
sions. 

I  find  that  I  understated  the  testimony  in  con- 
nection with  deferred  expenditures  on  equipment, 
and  I  will  ask  the  stenographer  to  note  a  refer- 
ence to  Mr.  Willard's  testimony  on  page  6344. 

I  may  also'  say  that  the  suggestion  as  to  de- 
ferred maintenance  on  my  part  never  contained 
the  slightest  intimation,  and  no  intelligent  person 


26 

could  consider  that  it  did,  that  there  was  no 
money  available  to  make  those  expenditures.  The 
reference  to  the  deferred  maintenance  was  simply 
for  the  purpose  of  showing,  which  is  a  fact,  that 
the  nine  months'  figure  of  net  operating  income 
was  necessarily  overstated  to  that  extent. 

The  suggestion  has  been  made  that  Congress 
can  deal  with  this  situation  by  repealing  the  pool- 
ing provisions  of  the  anti-trust  law  and  of  the 
Interstate  Commerce  Act,  or  by  providing  for  the 
loaning  of  money  to  the  carriers.  Of  course,  as 
has  already  been  pointed  out  by  several  members 
of  the  Commission,  that  will  not  help  the  labor, 
material  or  fuel  account. 

Commissioner  Aitchison: — Just  a  minute  on 
that,  Mr.  Patterson.  With  respect  to  the  pooling 
provision,  may  I  ask  what  the  attitude  of  the 
carriers  is  on  that? 

Me.  Patteeson: — I  really  do  not  know.  I  have 
no  authority  to  speak  for  all  the  carriers.  I 
would  be  very  glad  to  tell  you  what  my  idea  is. 

As  to  the  relation  of  surplus  to  total  capital,  it 
is  perfectly  futile  to  consider  the  capital  stock 
alone,  because  then  you  might  have  two  companies 
with  exactly  the  same  total  capitalization,  while 
one  of  them  has  a  very  high  percentage  of  stock 
and  the  other  a  very  low  joercentage  of  stock. 
You  would  have  there  for  each  carrier,  a  different 
class  of  surplus,  as  expressed  in  items  of  percent- 


27 

age.  The  only  measure,  of  course,  is  the  total 
capitalization 

Mk.  Thorne: — Can  you  name  one  financial 
house  that  uses  it? 

Mr.  Patterson: — Some  suggestion  was  made 
here  that  net  earnings  were  30  per  cent,  higher 
in  September  than  in  April.  The  percentage  is 
also  very  much  higher  than  in  February ;  but  that 
will  not  help  the  situation  if  we  are  correct  in  our 
belief  that  the  net  return  at  the  end  of  the  cal- 
endar year  1917  will  only  be  5.2  per  cent.,  which 
is  considerably  less  than  the  danger  point  indi- 
cated by  the  Commission  in  the  1914  case. 

Mr.  Reynolds  referred  in  his  argument,  as  I 
understood  him,  to  the  competition  that  his 
clients  have  with  the  artificial  ice  men.  Of  course 
the  artificial  ice  man  has  had  the  price  of  his  ma- 
terial tremendously  increased,  such  as  anmionia 
and  coal,  and  he  has  also  had  his  freight  rates  on 
coal  and,  I  presume,  on  ammonia  increased. 

What  we  are  trying  to  do  in  this  particular  pro- 
ceeding is  to  bring  up  the  remaining  one-third — I 
use  those  figures  roughly — of  the  traffic  which  was 
not  increased  last  spring.  There  does  not  seem 
to  be  any  particular  reason  why  they  should  not 
pay  the  same  rate  or  be  subject  to  the  same  in- 
crease as  that  traffic  w^hich  was  raised  last  spring. 

As  I  have  already  said  once  before,  this  morn- 
ing, this  increase  will  not  be  sufficient  to  meet  the 


28 


situation,  and  the  carriers  will  be  obliged  to  make 
applications  to  file  tariffs  asking  for  further  in- 
creases ;  and  in  so  doing  they  will  pursue  the  plans 
which  they  have  pursued  heretofore  and  which 
they  believe  meets  with  the  entire  accord  of  the  gen- 
eral shipping  public  and  the  approval  of  the 
country,  by  asking  for  a  general  percentage  in- 
crease on  class  and  commodity  rates  except  in  re- 
spect to  those  commodities  w^here,  for  reasons 
which  are  well  known  to  the  Commission,  it  is 
necessary  to  make  an  increase  in  cents  per  ton. 

I  want  to  say  just  this  one  word  in  conclu- 
sion, and  that  is  that  there  has  been  no  sugges- 
tion, on  the  part  of  the  carriers,  or  on  the  part 
of  anyone  representing  the  carriers,  that  the  car- 
riers desire  to  make  any  profits  out  of  this  war. 
What  the  carriers  do  desire,  however,  and  what 
the  carriers  insist  is  the  right  thing  to  do,  is  that 
the  general  burdens  of  the  war  shall  be  universal- 
ized; that  they  shall  not  be  localized,  and  par- 
ticularly, when  the  effect  of  the  localization  of 
that  burden  is  as  injurious  to  the  Government 
and  as  injurious  to  the  general  interests  of  this 
country,  as  it  is,  to  the  interest  of  the  carriers 
themselves. 

Commissioner  Anderson  : — I  would  like  to  ask 
of  you  substantially  the  same  question  that  I  asked 
Mr.  Throne.  There  has  been  a  lot  of  evidence 
put  in  here  as  to  the  attitude  of  the  investor  as 


29 

distinguished  from  what  you  might  call  the  in- 
ternal economic  condition  of  the  carriers.  In  the 
last  sentence  of  your  remarks  you  said,  in  sub- 
stance, that  the  question  was  not  an  economic 
question  as  affecting  the  condition  of  the  carriers, 
but  was  a  question  of  general  public  interest.  I 
did  not  quite  miderstand  what  you  meant,  and 
I  would  like  to  get  clear  in  my  mind  before  the 
hearing  is  closed  your  attitude  and  that  of  the 
carriers  whom  you  represent  on  the  distinction 
between  what  I  might  call  the  stock  market  credit 
and  the  sound  condition  of  the  carriers  apart 
from  credit  and  additions  and  improvements 
which  are  obviously  necessary  and  ought  to  be 
provided  out  of  new  capital. 

Mr.  Patterson: — I  do  not  think  I  understand, 
sir,  the  specific  question  that  you  want  me  to 
answer. 

Commissioner  Anderson: — Do  you  think  that 
the  rates  now  existing,  taking  into  account  the 
past  nine  months  and  the  reasonable  probabilities 
for  the  future  apart  from  the  conditions  of  credit 
and  the  getting  of  new  capital  for  additions  and 
improvements,  are  adequate  to  keep  the  carriers 
in  sound  condition,  carrjdng  the  fixed  charges, 
including  proper  allowance  for  depreciation  and 
obsolescence,  or  are  they  inadequate? 

]\iR.  Patterson  : — I  am  absolutely  certain — ^it  is 
the  only  thing  of  which  I  am  as  certain  as  of  the 


30 


mere  physical  fact  of  existence — I  am  absolutely 
certain  that  the  existing  rate  base  is  not  anywhere 
near  adequate  to  take  care  of  the  carriers  in 
the  conditions  which  you  have  described,  and  that 
it  would  be  a  great  public  menace  to  have  that 
situation  continue.  I  have  not  the  slightest  doubt 
about  it. 

Commissioner  Anderson  : — ^You  regard  this  rec- 
ord as  demonstrating  that  if  the  carriers  did  not 
need  another  dollar  for  additions  and  improve- 
ments and  had  no  occasion  to  consider  the  at- 
titude of  the  free  man  with  the  free  dollar  in  his 
pocket  that  the  present  rates  are  inadequate  to 
keep  the  existing  facilities  in  proper  and  efficient 
operation  and  pay  reasonable  dividends  and  fixed 
charges  ? 

Mr.  Patterson: — Absolutely  and  unqualifiedly. 

Commissioner  Anderson: — I  wanted  your  at- 
titude on  that. 

Commissioner  Aitchison  : — You  have  men- 
tioned several  times,  Mr.  Patterson,  the  necessity 
for  a  further  application  for  increases.  That  was 
suggested  to  us  at  the  informal  conference  which 
we  had  here  as  being  of  considerable  amount. 

Mr.  Patterson  : — Yes,  sir. 

Commissioner  Aitchison: — Do  you  not  think 
it  would  be  well  if  you  are  prepared  to  give  the 
Commission   some   idea,    and   the    country    some 


31 

idea,  of  what  further  increases  you  believe  are 
necessary — something  more  definite'? 

Mk.  Patterson  : — Of  the  amount  necessary  ? 

Commissioner  Aitchison  : — Yes. 

Mr.  Patterson  : — ^Well,  the  figures  are  jumping 
by  leaps  and  bounds  almost  every  day.  We  have 
had  within  the  last  week  $7,000,000  more  added  to 
the  Baltimore  and  Ohio  and  the  New  York 
Central.  We  have  not  got  yet  the  increased  price 
of  coal  that  is  going  to  come  in  in  November 
and  which  will  run  from  30  to  45  cents  a  ton. 

Commissioner  McChord: — ^And  if  it  continues 
to  come  in  by  leaps  and  bounds,  day  after  day, 
then  the  rates  must  be  raised  accordingly. 

Mr.  Patterson  : — They  must  be  enough  to  take 
care  of  the 

CoMMissiOER  McChord: — The  sky  is  the  limit. 
Do  you  think  the  rates  must  go  to  that  extent  ? 

Mr.  Patterson: — The  rates  must  go  just  as 
high  as  the  increased  costs  go.  That  is  the  only 
way  in  which  the  carriers  can  get  the  revenue. 

Commissioner  Aitchison: — ^Are  you  prepared 
to  give  us  any  idea  as  to  when  your  next  applica- 
tion will  be  and  whether  it  will  be  a  15  per  cent, 
application  or  20  or  upwards,  in  a  general  way? 

Mr.  Patterson:— No,  sir.  I  suppose  there  can- 
not be  any  question  that  the  application  would 
have  as  a  minimum  a  15  per  cent,  general  increase 


32 

on  class  and  commodity  rates,  and  possibly  10 
cents  -on  coal,  coke  and  ore. 

Commissioner  Aitchison: — That  is,  15  per 
cent,  of  the  increased  rates  ? 

Mr.  Patterson": — 15  per  cent,  of  the  increased 
rates.  And  those  figures  will  not  come  anywhere 
near — will  not  approach  in  the  slightest  degree, 
the  increases  which  the  other  government  price 
fixing  boards  have  made  within  the  last  month  in 
Washington. 


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